Fooled by Randomness


Often mistake luck and randomness for skill and determinism

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Key Takeaways
  1. In the long run, acute successful randomness fools will run out of luck and after years of success will have one devastating quarter where they lose everything in one huge blow up
  2. Induction - infer things about the nature of the world based on our observations. This approach leads to problems as one disconfirming piece of evidence (one black swan) makes the long held belief that all swans are white incorrect
  3. Can never be sure any theory is correct. Always consider the possibility that your theories and assumptions may be proved wrong and examine how such a development would affect your portfolio
  4. The past blowups were always surprises, as all future ones will be as well. Just because it hasn't happened before, doesn't mean that it won't
  5. Path dependent outcome - things sometimes end up as is because of luck or randomness (QWERTY), not because it is optimal
  6. Going the extra mile is disproportionately rewarded but without visible progress, most people give up before they succeed
  7. Human brain not built to accurately forecast or think about probabilities
  8. People get attached to things they already own but we should be able to accept change in our minds when presented with enough evidence
  9. Capability for rational reason can easily be overwhelmed by emotions
  10. We are inherently poor at understanding the impact of rare events
  11. The opposite but more enduring trading strategy is betting on rare, unlikely events with a big payoff should they occur. Although a market crash might be unlikely, it can still be worth betting on it if the possible reward in such an event is large enough
  12. If we are to be fooled by randomness, make it the best kind and work to your advantage
  13. In the face of randomness, act as stoics would - no self-pity, show personal elegance, don't blame others and don't complain
  14. Reduce exposure to noise - newspapers, daily stock market price movements,
What I got out of it
  1. Can't predict the big blow ups, can have years of success but all be wiped out in one catastrophic year

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